Social Policy and Development Programme Paper 6: Breaking the Mould: An Institutionalist Political Economy Alternative to the Neoliberal Theory of the Market and the State

24 Aug 2001

Author(s): Ha-Joon Chang

In this paper, the author critically examines the neoliberal discourse on reducing the role of the state, and proposes—as an alternative—an institutionalist political economy (IPE). He demonstrates that IPE, which is a theoretical framework that takes the role of politics and institutions seriously, can overcome neoliberal limitations.

Neoliberalism has fundamental limitations that stem, first of all, from the very way it sees the market, the state and institutions, and, second, from the way it underestimates their interrelationships. The study addresses four main aspects of neoliberalism: the definition of "free market"; the definition and implications of "market failure"; the assumption of "market primacy" (the view that the market is prior to other institutions, including the state); and the analysis of politics.

The author claims that neoliberal markets are institutionally very under-specified, and that a fuller institutional specification is required. Emphasizing the institutional nature of the market, he argues, requires bringing politics into the analysis of the market. This is because markets are political constructs, in the sense that institutions that embody rights and obligations define them, whose legitimacy is determined by politics.

The author argues against the generally held assumption that individuals have pre-formed motivations that are selfish. He states, individual motivations are fundamentally formed by institutions. Especially in the public sphere of the state, where non-selfish values are institutionally emphasized and actors thus internalize many such values, it is important to recognize the limits to self-seeking behaviour and the influence of institutions on individuals.

The author questions the neoliberal claim that politics inevitably corrupts the market. Not only are markets themselves political constructs, he argues, but the neoliberal notion of the "uncorrupted" market is based on a particular set of political beliefs that cannot claim superiority over other sets of political beliefs.

IPE is a "political economy" approach because, like the neoliberal analysis, it puts emphasis on the role of political factors in determining state policy. However, the political economy of IPE goes much further than its neoliberal counterpart in that it emphasizes the fundamentally political nature of the market and applies the political economy logic to the analysis of the market.

With this paper, the author hopes to break the mould of current debate on the role of the state, which is set by the very powerful and informative, but fundamentally flawed and misleading, discourse of Neoliberalism.

Ha-Joon Chang is the Assistant Director of Development Studies, Faculty of Economics and Politics, University of Cambridge, UK.

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